European Commission likely to find Hinkley aid illegal: Europe

London (Platts)--8 May 2014 602 am EDT/1002 GMT

The European Commission will almost certainly find that EDF Energy's funding mechanism for the construction of the Hinkley Point C nuclear unit in the UK is illegal state aid, an Austrian law professor told Platts.

Franz Leidenmuhler, who specializes in EU state aid cases and European competition law, said in an email that he believed "a rejection is nearly unavoidable. The Statement of the Commission in its first findings of December 18, 2013 is too clear. I do not think that some conditions could change that clear result."

The new Hinkley unit will be built based on a funding model in which the UK government guarantees a floor price for future power sales. This floor price, known as a "strike price," is the reference price below which EDF would receive UK government financial support and above which EDF would pay back money, effectively a guaranteed price for the power.

The strike price has been set at GBP92.50/MWh ($156.04) if the proposed new EPR there is the only new nuclear unit built by EDF Energy. The strike price would be GBP89.50 for both units if EDF is able to use the same EPR design to build another reactor at Sizewell C.

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The support, known as contracts for difference, will be delivered through investment contracts designed to provide the most efficient long-term support for all forms of low-carbon generation. If the EC were to find the aid illegal, it is unclear whether EDF would go forward with the construction of the new reactor.

In a speech delivered at an industry conference last month, Leidenmuhler said that "in my opinion, the result has to be that this CfD is illegal state aid. Contrary to renewables, there is no exception for nuclear power in the general block exemption regulation, so that, as a result, CfDs in the field of nuclear power are not compatible with EU law."

The EC Council in May 1998 adopted Regulation No 994/98, which enables the commission to adopt "so-called Block Exemption Regulations for State aid," according to the EC's website.

With these regulations, the commission can "declare specific categories of State aid compatible with the Treaty if they fulfil certain conditions, thus exempting them from the requirement of prior notification and Commission approval," the website said.

The categories of aid that are allowed under the block exemption include the areas of small- and medium-sized businesses, research, innovation, regional development, training, employment of disabled and disadvantaged workers, risk capital and environmental protection.

Leidenmuhler indicated he believed EDF's funding mechanism for Hinkley Point C did not meet these criteria to be granted an exemption for state aid.

However, George Borovas, an energy lawyer at Shearman and Sterling in Tokyo, said in an email to Platts that he believed some form of negotiation was likely take place before the EC formally rejected EDF's proposals.

"While the Commission has expressed substantial criticisms and concerns, it would be unusual for a project of this nature to be prohibited outright on State aid grounds," he said.

Borovas said that "instead, there will likely be a negotiation between the UK and the EU, resulting in a settlement of some sort, on issues such as the period of the CfD and the level of the strike price."

Borovas said there was "no fixed timetable for state aid investigations."

He noted the commission has said it expects to rule on state aid compliance before the end of 2014.

Borovas also said that "one important issue from the perspective of the nuclear industry is that the Commission's Hinkley Point decision may set a precedent not only for the UK but for all other EU nuclear projects."

He said the commission's "new State Aid for Energy guidelines do not include aid for nuclear energy and the Hinkley Point decision therefore has the potential to fill this missing element of the Commission's policy framework."

Borovas was referring to the EC's decision on Hinkley Point potentially setting a precedent for other new nuclear construction in Europe using a similar funding model, including potentially in Lithuania, Finland and Hungary. If the EC were to reject the Hinkley case, it is unlikely a similar funding model could be used elsewhere in the EU.

The issue of a potential precedent being set was a point emphasized indirectly by Leidenmuhler in his presentation, when he cited the recent decision by the Czech government not to offer aid guarantees for the construction of a new nuclear unit at Temelin that would be similar to the guarantees offered by the UK government for Hinkley Point C.

"The decision of the Czech Government three weeks ago not to give such price guarantees in the case of Temelin is not only an economically reasonable step, but also legally required from the view of EU State aid law," Leidenmuhler said.